Transcript Document
1
Happy living – which is the right annuity for me?
Mickey Gambale Momentum Wealth June 2013
2
Contents Presentation Disclaimer
The calculations used in this presentation are for illustrative purposes only. The information used for these calculations is based on assumptions utilised to further the understanding of the calculations. This is not the official position or opinion of Momentum and its employees. Momentum will accept no responsibility whatsoever for any loss caused by negligence or otherwise, including without limitation any direct, indirect, punitive or consequential loss resulting from the use of this information or the calculations.
3
Contents Contents
• • • • Regulatory / industry developments: “in search of a sustainable annuity” Are pensioners coping with realities?
Guiding factors to consider Is any annuity going to pay you enough?
4
Regulatory / industry developments: “In search of a sustainable annuity”
5
National treasury and retirement reform
Treasury released a number of overview discussion documents in where they outlined the following high-level considerations:
• Costs of retirement funds and related vehicles • The costs and risks for post-retirement income vehicles • Preservation , portability and uniform access to retirement savings • Savings and fiscal incentives – possible alternatives to encourage savings • Harmonisation of tax treatment of contributions
6
National treasury and retirement reform
• Reform proposals aim to extend the responsibilities of trustees to guide members through the retirement process, • Requiring them to make a default retirement product available • Default could be a guaranteed, living or hybrid annuity • Option to opt out of the default with their entire retirement balance • Trustees will be given some protection in respect of the default • An FSB directive is expected outlining the minimum requirements that Trustees must meet. • The final round of consultation is intended to be completed towards the middle of the year, with the first changes expected to be implemented from 2015 and forward.
ASSA Convention 2012: In search of a sustainable retirement income
GAs better equipped than LAs to provide an inflation linked income for life, because: 1.
Impact of mortality pooling and the drawdown cap:
Source: Lodhia & Swanepoel 2012: Living versus Guaranteed annuities: In search of a sustainable retirement income
7
Industry conclusions
Are living annuities appropriate products? • The financial adviser will assist clients in making suitable investment decisions The Media’s interpretation Financial advisers • • “Headlong plunge by 85% of retirees into living annuities at retirement could be creating a generation of impoverished pensioners” Living annuity 'not your best first choice' - Personal Finance Retirement • “Accused of mis-selling living annuities to reap commissions” – from Actuarial Society Convention • “Where was this research when we were being told to sell living annuities by the product houses?” 8
9
Are pensioners coping with realities?
10
Why so many taxpayers moved over to LAs and then failed?
Shady Pines retirement village
Most presented with a retirement based on conventional life annuity face a grim retirement from day one
Changing economic and investment cycles
We live in a different world with interest rates < half those 20 years ago
Increased energy prices
Only a Ponzi Scheme has any prospects of yielding an after-tax return that can keep pace with today’s Eskom increases
Medical costs
just one major setback in a family is enough to severely dent most retirement plans
KIPPERS
Kids in Parents’ Pockets Eroding Retirement Savings. Many LAs overdrawn to support family rather than pensioners
Why should I trust insurance companies
Why should I work for 40 years to give my money away?
Poor decision making
Is it possible that some clients and their financial advisers do not understand the risks embedded in LAs?
*Sunday Times: Money & careers by Matthew Lester
11
12
Guiding factors to consider
Is it fair to compare a life and a living annuity?
If you’re comparing life annuities to other investment products such as a living annuities, you’re making a classic mistake!
13
Mistake 1: focusing on returns
• The market sells returns - people misunderstand life annuities because financial experts and the media have
focused on saving for retirement
and, to a large extent
,
investment returns and “return management,” rather than risk management
and, specifically
, the risk of outliving one’s assets.
• Allowing prevailing interest rates to be a deal breaker. It’s true that lower interest rates can mean a lower pay out, but the reason to buy an annuity is because you
want the absolute insurance of having that income in your bank account every month for life.
14
Mistake 2: failing to annuitize
• Perhaps the biggest mistake is
simply failing to annuitize assets to create a guaranteed stream of retirement income.....
•
A focus on historical returns
may make life annuities seem like a bad deal. But that
may change going forward
• The last decade showed us that though it was fairly
easy take money from a portfolio and have that portfolio survive for a long time this may not be the case going forward
15
Mistake 3: unfair comparisons - costs
• Assess the value of a annuity as though all of its
costs are nothing but pure overhead is wrong
• Life annuities costs include
charges for the transfer of risk.
Living annuities costs are
ongoing risk and portfolio management
•
Any insurance product on the planet will not pay off on average
. That’s something IFA’s
need to recognize when we analyse risk-management strategies
• Insurance costs shouldn’t be ignored neither should investment costs. They might be too high or too low. But insurance
shouldn’t be compared to investment products
16
Living vs.. Life annuities, should they be compared
Living annuities
• Provides for an income linked to investment portfolio • Flexible drawdown range 2.5% - 17.5% • The flexibility of the offering enables you to enjoy the potential growth if the market performs • It is an investment and not an insurance product 17
Living vs.. Life annuities, should they be compared
Life annuities
• Pass on all the risk to life companies • The benefits of pooling works in your favour, but equally so against • You should have saved enough to get a good starting income • Life annuities are a insurance and not a investment product 18
19
Consider a Living Annuity if Consider Guaranteed Annuity if
You have
sufficient capital at retirement and you want flexibility
You have access to
skilled, trusted
and
independent financial advice
You want to
leave a financial inheritance
when you die You require a known
guaranteed annuity
with
no investment risk
during retirement You don’t want to run the risk of
out living your income for the rest of your life
You are
not married
and / or you
don’t care what happens
to your money
when you die
You would like to be
involved in decision making
during retirement You have a
life expectancy
<
15 years
You want to benefit from the
mortality benefits offered by risk pooling
You have a
life expectancy
>
15 years
20
Is any annuity going to pay you enough?
21
I t depends on how much you’ve saved. A life annuity isn’t a solution for saving too little, though it does protect you against running out of money
Looking back on reality
Corporate John
• Current salary at retirement R500k • Discount rate of 6% • Investment growth of 9% pa after fees (no tax) • Retires at age 65, wife 60 • Worked for 40 years • Purchases joint life CPI linked annuity with 33% reduction on first death 22
Looking back on reality Corporate John example:
CTC / Salary Pension Tax Medical Deductions (tax, medical, etc.) Net Net salary pm
Expenses
Bond Car Insurance Travel Food Municipal Clothes Communication Entertainment Surplus / deficit
Total pension at retirement
% of original Monthly % saved to achieve lump sum Pre retirement 500 000 62 500 86 000 48 000 post retirement reality 116 569 3 152 48 000 post retirement perfect preservation 194 449 19 582 48 000 post retirement 75% net 265 850 38 225 48 000 post retirement 75% gross 375 000 72 420 48 000 196 500 303 500 25 292 51 152 65 417 5 451 67 582 126 866 10 572 86 225 179 625 14 969 120 420 254 580 18 154 25 000 8 000 3 000 1 500 2 000 5 000 2 000 1 000 500 2 000 292 14 000 1 500 2 000 5 000 2 000 1 000 500 2 000 -8 549
2 567 116
60% 14 000 1 500 2 000 5 000 2 000 1 000 500 2 000 -3 428
4 278 526
100% 12.50% 14 000 1 500 2 000 5 000 2 000 1 000 500 2 000 969
5 847 384
137% 17.50% 14 000 1 500 2 000 5 000 2 000 1 000 500 2 000 4 154
8 245 821
321% 24.00% 23
Pensioners look back
R 2500 000,00 R 2000 000,00 R 1500 000,00 R 1000 000,00 R 500 000,00 R Amount - Portfolio Amount - Inflation Monthly annuity 24 R 14 000,00 R 13 000,00 R 12 000,00 R 11 000,00 R 10 000,00 R 9 000,00 R 8 000,00 R 7 000,00 R 6 000,00 R 5 000,00 R 4 000,00 R 3 000,00 R 2 000,00 R 1 000,00 R -
Where to from here?
• Educate market to gain a better understanding of trade-offs between LA and GA both by client and IFA • Retirees need to better understand the impact drawing down too much income • Requirement for higher equity exposure and associated volatility if they opt for a living annuity • How do we continuously support / monitor to ensure sufficient income in retirement?
• Engagement with requlators • Collaborate across product houses and industry players to create innovative products and support one another 25
26
“Human behavior flows from three main sources: desire, emotion, and knowledge. ”
– Plato 424-348 BC
As the people in the know our purpose should be to create responsible solutions for stress-free living and a comfortable retirement for all our clients
27